A court, or not a court: that is the question

Subway Systems Australia v Ireland [2013] VSC 550

This case decided that VCAT is not a “court” for the purposes of the Commercial Arbitration Act 2011 (“CAA”) and therefore is not obliged to refer parties to arbitration in accordance with section 8 of the CAA where the matter before VCAT is the subject of an arbitration agreement.

Facts

A dispute arose between franchisor, Subway Systems Australia Pty Ltd (“SSA”), and franchisees, Aaron and Lynette Ireland (collectively “Ireland”), all of whom were based in Australia. The franchise agreement between the parties contained an arbitration clause.

Ireland commenced a proceeding before VCAT claiming damages on the basis that SSA breached the franchise agreement by not allowing Ireland to operate the Subway business at an agreed location. SSA, the respondent to the VCAT proceeding, applied to stay the proceeding in accordance with section 8 of the CAA. VCAT refused the stay and instead heard and determined the proceeding.  SSA sought leave to appeal a question of law to the Supreme Court, being whether VCAT is a “court” pursuant to section 8 of the CAA and therefore obliged to refer the parties to arbitration in a matter which is the subject of an arbitration agreement.

Parties’ Submission

Section 8 of the CAA states that a court before which an action is brought where the matter is the subject of an arbitration agreement, must, if a party so requests, refer the parties to arbitration provided the agreement is valid, operative and capable of being performed.

SSA argued that VCAT was mandated to stay the proceeding because it was a “court” for the purposes of the CAA. SSA submitted that the word “court” should be given a liberal and beneficial construction to accord with the purpose of the CAA 2011.[1]

On the other hand, Ireland relied on the 2011 decision of the Victorian Court of Appeal in Director of Housing v Saudi [2] where VCAT was held not to be a court “in the sense in which the word ‘court’ is generally understood in administrative law”.[3]

Decision

Croft J held that VCAT was not a court for the purposes of the CAA and therefore it was not mandated to stay the proceeding brought before it, notwithstanding the arbitration agreement contained in the franchise agreement between the parties.

Croft J expressed the view that the Victorian Parliament had given considerable care to the definition provisions in section 2 of the CAA and that this was evident in the special consideration of the relationship between the term “the Court” in section 2(1) and the provisions relating to courts in sections 6 and 8 of the CAA.[4] Croft J also noted that specific reference was made to the Supreme Court, the County Court and the Magistrates’ Court in section 6 of the CAA and that if Parliament had “intended to refer to VCAT in any of these provisions, particularly in section 8, it was open to have done so”.[5] His Honour went further to say that by referencing particular courts by name in section 6 of the CAA the legislative intention is clear, and that accordingly Parliament had considered the “body or organ of the judicial system”[6] which it intended the CAA to apply to. Croft J also noted that since there is no reference to VCAT in these provisions, and given that there is express reference to various courts by name, “it is clearly not open to parties to agree that the functions provided for in section 6 of the CAA could be performed by VCAT”.[7] Ultimately, His Honour found that VCAT is not a “court” for the purposes of section 8(1) of the CAA and that consequently, VCAT was not bound to refer the dispute between Ireland and SSA to arbitration, pursuant to section 8 of the CAA.

Croft J noted that if a proceeding is commenced in VCAT where an arbitration agreement between the parties exists, VCAT may make an order under section 77 of the VCAT Act referring the dispute to the arbitral tribunal as a more appropriate forum. Section 77 does not in terms deal with the “stay” of VCAT proceedings. Rather, it states that the Tribunal “may make an order striking out all, or any part, of a proceeding” (s. 77(1)).[8] An order made under s. 77(1) is the trigger for a referral under s. 77(3) which states that VCAT “may refer the matter” to the relevant tribunal, court or body if it considers it appropriate to do so. However, unlike s8 of the CAA, VCAT in these circumstances is not required to refer the parties to arbitration. Indeed, “a high level of satisfaction is required” before such an order will be made.[9]

Comment

VCAT has broad civil jurisdiction, including in respect of disputes where millions of dollars are in issue. One of the major amendments brought about by the new CAA (which replaced the old uniform domestic arbitration Act of 1984) was to replace a court’s broad discretion (in s53) whether or not to stay a proceeding brought in the face of an arbitration agreement with a mandate to stay such proceedings, subject to very limited exceptions.[10] While Croft J was, with respect, correct in his interpretation of the word “court” in the CAA, it does produce a somewhat anomalous and arbitration unfriendly result which might be said to undermine the recent amendments to the arbitration law in Victoria. Accordingly, Parliament should consider amending the VCAT Act to expressly provide that the CAA applies to VCAT, so that like the Supreme Court of Victoria VCAT is mandated to stay proceedings brought before it where the subject matter of the proceedings is the subject of an arbitration agreement.